Ownership of oil, gas or mineral interests can be rewarding, but can also be complicated, especially if the interests are owned by an individual person…and that person dies. There are options available to make the transition of who receives the benefit of the interests relatively smooth and uneventful. Before you can transfer ownership of your oil, gas or mineral interest, you must determine what type of interest you own. Do you own the actual real property – the land – that contains the oil, gas or mineral deposits? Or is your interest limited to a right to the oil, gas or mineral deposits that is separate from the land itself? Or, do you have an interest contained in a lease or royalty agreement, or a combination of two or more of these things?
If you own the actual real property that contains the oil, gas or mineral deposits, you may simply transfer the ownership of the land (which includes the deposits) by a deed. If you own a right to the oil, gas or mineral deposits that is separate from the land itself, or if it’s an interest in a lease or royalty agreement, you will need to reassign your rights to the separate interest, lease or royalty interest. If it is the latter, you, or the new owner may have to contact the company that pays the lease or royalty payments to determine the process they require to transfer the interest to a new individual. When any of these types of interests are owned by an individual person who dies, probate will be required to transfer the interest(s).
If you are familiar with general estate and succession planning concepts, you are aware that when you use a trust or another entity, you may be able to avoid probate or at least minimize surprises for your heirs upon your passing. Consider basic planning techniques to simplify the transfer of oil, gas and mineral deposits. Trusts and other entities don’t die, only beneficiaries of trusts and members of entities, such as a limited liability company (LLC) die. It is possible to use the following suggestion whether you own the actual interest in the land, or otherwise, but for purposes of this article we will consider that you own the actual real property that contains the oil, gas or mineral deposits.
You may establish “Family Oil, LLC.” You may then prepare a deed in which you, as an individual grant the ownership of the land and the oil interest to Family Oil, LLC. The deed is recorded with the county. The owner of record for your land, with the oil deposit will be Family Oil, LLC. Perhaps you and your spouse are the initial members of Family Oil, LLC, just as the two of you may have been the individual joint owners. The difference is that you were the owner of the real property, including the oil deposit. Now, with the LLC, you own a personal property interest in the LLC and the LLC as an entity owns the underlying real property interest, including the oil deposits. We don’t stop with the deed. Rather, you will need to make sure that you prepare an appropriate Operating Agreement (“OA”), the governing document for the LLC which should have provisions that reconcile with your estate plan to provide how the LLC interests transfer to your kids, or other desired heirs. Simply, following the passing of you and your spouse, and pursuant to the provisions of the LLC OA and your estate plan the LLC interests pass to your kids. Nothing needs to be filed with the oil company. The oil company records indicate that Family Oil, LLC is the owner of the oil deposits. The members of the LLC may change but that does not require any change with the oil company.
Anticipating your question, if you establish an LLC and deed the oil, gas or mineral deposits to the LLC will your estate avoid probate. The answer – generally, no. The reason is that the LLC membership interest is owned by you as an individual, and absent a detailed plan using transfer on death designations with the LLC unit certificates, probate will be required to transfer the LLC interest to your intended heirs. However, you may be able to avoid probate by including a revocable trust in your personal estate plan, and, if you have already taken the step to establish and LLC to own the oil, gas or mineral interest, you can have the trust own the LLC interest. If you have not formed an LLC, you can transfer the oil, gas or mineral interest to the trustee of your trust directly. The key in using the trust is that the trust must be funded with such interest prior to your death to avoid probate. As stated, by funding a trust with the oil deposits without the use of an LLC prior to your death by granting ownership with a deed to the trustee of the trust, and recording the trust, will avoid probate. And provided you alert the oil company that your trust owns the interest, the oil company will revise its records to indicate the interest is in trust. However, if you are only using a trust, you may not have the luxury of having the interest held in an entity for perpetuity. Let me explain.
The LLC is a company. The term may be perpetual. Unless someone takes a step to liquidate and dissolve the LLC it will exist for generations of your family. This provides that the oil, gas or mineral deposits will remain in the LLC indefinitely and there is no need to alert the oil company unless there is an address change. Whereas, if you are only using a trust as a tool in this situation, practically the trust will not go on for generations and at some point, you run the risk of individual ownership again in the future.
There may be one more twist to all of this that may apply to your situation. Perhaps you have a child who wants to continue farming or ranching and it may be appropriate to transfer the land itself to that child. However, that land may have oil, gas or mineral deposits which you would like to benefit all of your children. It is possible to do just that. In short, you will bifurcate the ownership of the real property. In general you will have two deeds. One deed which transfers the land itself, excluding the oil, gas and mineral deposits, to the child you wish to continue farming or ranching, and the second deed will transfer the oil, gas and mineral deposits to the children you wish to benefit from such deposits. If you apply what you read earlier in this article, you will be one step ahead and realize that if you are deeding the oil, gas or mineral deposits for the benefit of children that actually you should consider establishing an LLC, name your children as members of the LLC and deed the oil, gas or mineral deposits to the LLC and not to the individual children.
One other point to keep in mind is if you own real property, land and/or oil, gas or mineral deposits in a state outside of Nebraska, you should consult with an attorney as you will want to make sure your plan is appropriately designed so that your estate will not be faced with ancillary probate , meaning probate not only in Nebraska, but also in the state in which you own real property in your individual name.
The purpose of this article is to share with you the relevant topic of oil, gas or mineral deposits that many of you may be discovering are producing interests and with that, producing revenue. As mentioned above, land owners are recognizing that while they may have one or two children who want and need the actual land for ag production, they have additional children with whom they want to share the benefit of oil, gas or mineral deposits. While it is not a one-size-fits all situation, I have provided you with an overview of different options of how you might transfer the real property interests in land as well as the oil, gas or mineral deposits within such land, with the added benefit of avoiding probate or at least minimizing the administration of your estate upon your passing.
Ownership interests in oil, gas or mineral deposits can be extremely complicated, and this article is not intended to provide you with legal advice for your specific situation. If you would like to discuss your specific situation, please contact our office or an attorney of your choice who is licensed to practice law in the state where your rights or real estate are located.
